Toll manufacturing and contract manufacturing are two relatively similar forms of
supply chain management that are often misunderstood and confused. While
both of these manufacturing options have distinct and clear characteristics, their
most strategic advantage is their ability to provide customers with valuable
ways to save both time and capital on their product line development.
On-Demand Service
In many ways, contract and toll manufacturing are similar to other on-demand
services like Uber, Seamless, and HBO Go. They allow Sierra Coating to
provide laminating or coating services on demand and as needed, as part of a
“sharing economy” model that is beneficial for both the customer and the
manufacturer.
“Sierra has delivered us a quality product for years, on
time all the time. If there is any kind of an issue they
always get right on it.”
Brian, Company is a 10-year customer
Below, we will highlight the advantages and distinctions between toll and
contract manufacturing to help you make the best decision for your company.
What is Toll Manufacturing?
In toll manufacturing, one company provides raw materials (or semi-finished
goods) to a third-party, who will then provide the rest of the services
(manufacturing). Typically, the third-party company will already have particular
equipment and organizational models in place, and they can supply subclasses
of manufacturing processes for the first company for a fee – or toll.
As a toll manufacturer, Sierra Coating can provide customers with a facility and
manufacturing equipment to process their raw materials or semi-finished
products. Because of this, the customer only has a variable cost of
manufacturing without the financial investment in equipment, facilities, and
employees. With toll manufacturing, the customer is equipped with the resources
to develop their own specialty coatings or papers that Sierra Coating can use in
the manufacturing process. Subsequently, the customer is able to develop the
exact product they envision, without the time and capital investment of building a
manufacturing operation. This significantly decreases the time required to get
the product to market, as lead times for ordering and installing new machinery
are eliminated.
At Sierra Coating, customers are able to supply one or more of the raw materials
needed for production or, if the customer prefers, the Sierra Coating team can
supply the materials.
Key Differences with Contract
Manufacturing
Though contract manufacturing is similar to toll manufacturing, there are some
key differences between the two. Similar to toll manufacturing, contract
manufacturing involves outsourcing production processes to a third-party
company. In contract manufacturing, however, the third-party company hired to
produce the goods is supplying the manufacturing process as well as sourcing
all of the raw materials. Contract manufacturing is creating a supply chain
vendor for a branded, private label or custom-made product. The contract
manufacturer is responsible for making the product to specification and meeting
the delivery time requirements. This offers the customer a fast and effective
method of extending their product line with minimal investment and a made-toorder supply program.